Most people know Medicare comes out of their paycheck long before it ever pays a doctor’s bill. But how is Medicare funded, exactly, and does that answer change once you’re actually enrolled? It turns out Part A and Part B are paid for in two very different ways, and knowing the difference helps explain why one comes “free” and the other always carries a monthly bill.
The short answer: two parts, two funding sources
Medicare isn’t one pot of money. It’s split into two separate trust funds, and each one is filled a different way.
Part A, hospital insurance, is funded mainly by a payroll tax you and your employer pay while you’re working. That’s why most people don’t pay a monthly premium for it once they turn 65: their years of payroll taxes already helped finance their eligibility for premium-free coverage.
Part B, medical insurance, works differently. It’s funded by a mix of monthly premiums from people enrolled in it and general federal tax revenue, the same pool of money that pays for things like national defense or education. There’s no dedicated Part B payroll tax.
How Part A gets its money: the tax on your paycheck
Every time you get a paycheck, look at the deductions. You’ll see Social Security tax and Medicare tax listed separately. The Medicare portion is 1.45% of your wages, matched by another 1.45% from your employer, for a combined 2.9%. If you’re self-employed, you pay both halves yourself.
Unlike Social Security tax, which stops once your wages pass a yearly cap, the Medicare tax applies to every dollar you earn. There’s no ceiling. If you earn $60,000 or $600,000, the 1.45% employee share applies to all of it.
High earners pay a bit more. Since 2013, an Additional Medicare Tax of 0.9% applies to wages above $200,000 for single filers and $250,000 for married couples filing jointly. Those thresholds haven’t changed since the tax began and aren’t adjusted for inflation, so more people cross them each year as wages rise.
This money flows into what’s called the Hospital Insurance (HI) Trust Fund. It also gets smaller contributions from taxes on Social Security benefits and interest earned on the fund’s reserves, but payroll taxes do most of the work.
Say Frank turns 65 next year
Frank worked steadily for 35 years, paying Medicare tax on every paycheck the whole time. Because he has more than 10 years, or 40 quarters, of Medicare-covered work, he qualifies for what’s called premium-free Part A. He won’t get a monthly bill for Part A. He helped finance his eligibility for premium-free Part A through decades of Medicare payroll taxes.
Need Medicare Help? Get FREE personalized guidance from our trusted partner Chapter — they represent all major plans and will help you find the one that’s right for YOU.
-Call Now: 440-703-1224 or click https://askchapter.org/flow/schmidt to get a complete Medicare plan review
What if you didn’t work long enough to qualify?
Not everyone has 40 quarters of Medicare-covered work. Maybe you spent years staying home with kids, working abroad, or in a job that didn’t pay into the system. If that’s you, you can still buy Part A.
In 2026, the Part A premium for people who don’t qualify for the free version is $311 or $565 a month, depending on how many quarters of Medicare-covered work you or your spouse have. The fewer quarters, the higher the premium.
If you’re eligible to buy Part A and don’t sign up when you’re first eligible, a late enrollment penalty applies. Your premium can go up 10%, and you’ll pay that higher rate for twice the number of years you could have had Part A but didn’t.
What premium-free Part A actually costs you later
Even with no monthly premium, Part A isn’t free at the point of care. If you’re admitted to the hospital, you pay a deductible of $1,736 for each benefit period in 2026. After that, here’s what you owe during a hospital stay:
- Days 1 to 60: $0 a day, once you’ve paid the deductible
- Days 61 to 90: $434 a day
- Days 91 and beyond: $868 a day, drawing from a lifetime pool of 60 reserve days
- After those reserve days are used: you pay all costs
Skilled nursing facility care works on a similar structure, with no charge for the first 20 days of a benefit period and $217 a day for days 21 through 100.
How Part B gets its money: premiums plus general tax revenue
Part B works on an entirely different model. There’s no payroll tax feeding it. Instead, it’s funded through the Supplementary Medical Insurance (SMI) Trust Fund, which draws from two sources: your monthly premium and general federal revenue.
By law, premiums are generally designed to cover roughly 25% of Part B costs for the year. The federal government covers the rest out of general tax revenue, the same fund income taxes go into. That’s a different arrangement than Part A, where payroll taxes provide most of the program’s funding.
The standard Part B premium in 2026 is $202.90 a month. Most people pay this amount. If you get Social Security or Railroad Retirement Board benefits, it’s deducted automatically from your monthly payment. If not, you’ll get a bill directly, usually every three months.
This premium applies no matter how you get your Medicare coverage. Even if you enroll in a Medicare Advantage plan instead of Original Medicare, you still pay your Part B premium each month.
Part B also has its own yearly deductible, $283 in 2026. Once you’ve met it, Medicare typically pays 80% of the Medicare-approved amount for covered services, and you pay the remaining 20% as coinsurance, with no yearly cap on that out-of-pocket coinsurance under Original Medicare.
Why higher earners pay more for Part B
Because part of Part B’s funding comes from your premium and part comes from the general taxpayer pool, Medicare adjusts what higher earners pay so they’re covering a larger share of their own costs. This is called the Income-Related Monthly Adjustment Amount, or IRMAA.
For 2026, IRMAA applies if your modified adjusted gross income from 2024, reported two years earlier, was above $109,000 for an individual filer or $218,000 for a married couple filing jointly. If you’re above that threshold, you’ll pay more than the standard $202.90 premium.
Say Linda and her husband file jointly with income above the threshold
Linda and her husband are both on Medicare. Because their joint income from two years ago put them over $218,000, they each pay more than the standard Part B premium. The extra amount they pay reduces how much of their coverage comes from general tax revenue and shifts more of the cost onto them directly. This is one of the reasons it helps to understand, well before you enroll, how your income two years back will affect what you pay once you’re on Medicare.
Why the two funding methods matter to you
The difference between how Part A and Part B are funded isn’t just a technical detail. It affects your planning in a few practical ways.
Because Part A is funded by a trust fund tied to payroll tax collections, its financing is more sensitive to the size of the working population paying into it. The trustees who oversee the Hospital Insurance Trust Fund have reported that, without legislative changes, the fund’s reserves are projected to be used up sometime in the early 2030s. That doesn’t mean Part A stops paying benefits. If the trust fund reserves were exhausted, incoming payroll taxes and other revenues would still continue to fund most scheduled benefits, an estimated 90% of the total under current projections. Congress has adjusted Medicare’s financing before when this kind of shortfall approached, and it’s a topic worth watching rather than worrying over today.
Part B works differently. Because it’s funded year to year through premiums and general revenue that adjust automatically to meet costs, it doesn’t face the same kind of funding cliff. The tradeoff is that rising Part B costs show up directly in your premium and in IRMAA brackets, which is one more reason it pays to understand exactly how your income and Medicare costs interact well before you file for benefits.
Knowing this also matters when you’re comparing Original Medicare to a Medicare Advantage plan, or deciding whether to add a Medigap policy. Each option changes what you pay and how predictable those costs are. Given how many moving pieces are involved, from IRMAA brackets to enrollment deadlines to plan comparisons, many people find it worthwhile to get independent help sorting through the options rather than guessing.
The bottom line
Part A is funded mainly through the payroll taxes you and your employer already paid while you were working, which is why most people get it without a monthly premium. Part B is funded through a mix of your monthly premium, designed to cover roughly a quarter of costs, and general federal tax revenue covering the rest. Both funding streams shape what you’ll actually pay once you’re enrolled, from your Part A deductible per benefit period to your Part B premium and any IRMAA surcharge based on your income.
This article is for educational purposes and isn’t personalized financial, tax, or medical advice. Medicare rules and dollar amounts change every year, so confirm your specific numbers with Medicare.gov, Social Security, or a qualified professional before making decisions about your coverage.
Note Chapter is an affiliate relationship of Holy Schmidt!. This means if you purchase a product or use their service, we earn a small commission. This does not increase your cost.
Chapter Advisory, LLC (“Chapter”) is a private health insurance agency. In California, Chapter does business as Chapter Insurance Services (Lic. No. 6003691). Chapter is not affiliated with or endorsed by any government entity. While Chapter has a database of every Medicare plan option nationwide and can help you to search among all options, it has contracts with many but not all plans. As a result, Chapter does not offer every plan available in your area. Currently, Chapter represents 50 organizations which offer 18,601 products nationwide. You can contact a licensed Chapter agent to find out the number of products available in your specific area. Please contact Medicare.gov, 1-800-Medicare, or your local State Health Insurance Program (SHIP) to get information on all of your options. Enrollment in a plan may be limited to certain times of the year unless you qualify for a Special Enrollment Period or you are in your Medicare Initial Enrollment Period.
Average potential savings are based on realized premium, co-pay, and out of pocket savings estimates self-reported by consumers that worked with Chapter Advisory LLC to enroll in a Medicare Supplement, Medicare Advantage, and/or Part D Prescription Drug Plan. The average is limited to consumers that chose to self-report. Savings information is subject to periodic updates and corrections. There is no guarantee of savings and any savings may vary by policy type, state, or other factors.
Add comment